Trade and Development Bank — Moody’s changes outlook on TDB to stable from negative; affirms Baa3 ratings
Rating Action: Moody’s changes outlook on TDB to stable from negative; affirms Baa3 ratingsGlobal Credit Research – 18 Feb 2022London, 18 February 2022 — Moody’s Investors Service (“Moody’s”) has today changed the outlook on Trade and Development Bank (TDB) to stable from negative and affirmed the Baa3 long-term issuer and senior unsecured debt ratings and the (P)Baa3 senior unsecured MTN programme rating.The change in outlook to stable takes into account TDB’s improved liquidity position and increasingly diversified funding sources. It also reflects the resilience of TDB’s capital position despite a challenging operating environment aggravated by the pandemic.Moody’s affirmation of the Baa3 ratings reflects TDB’s moderate capital adequacy and expectations that the bank’s leverage metrics will remain broadly stable in the medium term. The bank has a solid track record of profitability and its shareholder base has expanded continuously. The affirmation also reflects TDB’s credit risk mitigation instruments that offer a degree of protection to adverse scenarios impacting its balance sheet from the financial stress experienced by some of its borrowers. While TDB’s shareholders’ ability to support is constrained by their own predominantly weak credit profile, TDB benefits from a mid-term credit risk mitigation instrument that improves the bank’s overall creditworthiness by effectively increasing the likelihood of timely equity injection in the event of a call on additional capital by the bank.RATINGS RATIONALERATIONALE FOR CHANGING THE OUTLOOK TO STABLETDB’S LIQUIDITY POSITION HAS STRENGTHENED, SUPPORTED BY THE BUILD-UP OF LARGE BUFFERSThe first driver for stabilizing the outlook is TDB’s improved liquidity profile supported by large buffers and increasingly diversified funding sources. TDB’s total liquid assets at the end of 2021 (according to unaudited financials) consisted of cash deposits amounting to about $1.4 billion held with entities rated at or above Baa3. The quality of liquid assets has also improved, with the share of liquid assets rated A2 or higher at $1.2 billion as of December 2021 from $0.9 billion as of December 2020.Moody’s considers a stress scenario in which the Multilateral Development Bank (MDB) loses market access, and compares the stock of high-quality liquid assets to estimated net cash outflows over the coming 18 months. Based on TDB’s liquid asset position and estimated net outflows at the end of 2021, in such a scenario its liquid asset coverage would exceed 170% at end-2021, up from 79% at end-2020, and well above the median of Baa-rated peers which stood around 55% at end-2020. While some of this liquidity improvement is temporary due to lower disbursements in the aftermath of the coronavirus shock, Moody’s expects the liquidity buffers to remain adequate and stronger than pre-pandemic.Moreover, liquidity remains supported by access to committed facilities from development institutions. Unutilized long-term credit lines exceeded $700 million as of December 2021. TDB’s access to funding has proved resilient in the past two years. Since the outbreak of the pandemic, it has secured new facilities from a broadening pool of bilateral and multilateral development institutions, including concessional loan facilities for on-lending as well as guarantees on commercial loans, helping TDB to contain the cost of funding despite more challenging market conditions in the early months of 2020. In 2021 TDB issued a $650 million seven-year eurobond at a reduced cost compared to early 2020.RESILIENT CAPITAL ADEQUACY AMID CHALLENGING OPERATING ENVIRONMENTMoody’s decision to change the outlook from negative to stable is also driven by the demonstrated resilience of TDB’s capital position, reflecting stable leverage and asset performance, the latter despite deteriorating credit conditions in several of its countries of operations.TDB’s leverage ratio has remained broadly stable at 4.2X as of June 2021 (per published financial accounts), compared to 4.1X in 2020 and 4.2X in 2019. This was mainly the result of increasing usable equity although loan growth moderated compared to previous years. TDB is among the MDBs with consistent and strong profitability, with return on assets and return on equity estimated at above 2% and 10% in 2021, respectively. Paid-in capital also increased by an estimated 4% last year, albeit at a slower pace compared to 2020. Moody’s expects that the bank’s equity will continue to expand thanks to its current capital mobilization initiative. In late 2020, shareholders approved a $1.5 billion capital increase, which comprises $1 billion allocated to new Class C shares aimed at new types of investors, in particular global impact investors.In a similar vein, TDB’s asset performance has remained broadly stable over the past two years, despite the challenging operating environment in Eastern and Southern Africa. Non-performing loans (NPLs) stabilized at 2.9% of gross loans as of end-2021 in line with June 2021 and December 2020, while the share of loans to selected borrowers whose terms have been modified to provide temporary pandemic-related relief declined to about 2% of total loans as of end-2021 from about 4% as of end-2020.Portfolio concentration has also declined, with the top 10 exposures accounting for an estimated 62% of the total at end-2021, down from about 70% in 2019 and 2020.RATIONALE FOR AFFIRMING THE Baa3 RATINGSMoody’s affirmation of TDB’s ratings at Baa3 is underpinned by the expectations that TDB’s capital adequacy will remain broadly stable at current level, as growth in equity – supported by continued relatively strong profitability and planned capital increase – will allow to pursue its managed growth strategy tied by the maintenance of capital adequacy and asset quality metrics.Moody’s expects pressures on asset performance to persist over the next two years, although NPLs are expected to remain at a manageable level. Moody’s notes that the credit quality of TDB’s borrowers has further weakened from an already low position over the past year and exposure to countries rated in the Caa rating category or lower account for about 60% of total loans. That said, TDB extensively uses collateral and insurance policies to limit the risks stemming from the very weak borrower credit quality of large exposures and also benefits from a risk participation program to share risks with a number of institutions. In 2021, the bank had more than $700 million in both funded and non-funded risk participation agreements with highly rated institutions. Nevertheless, exposure to Zambia’s Ministry of Finance in particular accounts for 7% of TDB’s total loan portfolio as of December 2021 and the rating agency expects that TDB will be involved in the negotiations for the restructuring of Zambia’s (Ca stable) debt under the Common Framework.Moody’s expects that the bank will continue to proactively implement measures aimed at mitigating the risks inherent to its difficult operating environment, protecting its asset performance, through further portfolio diversification, use of credit enhancements such as insurance and risk participation agreements, and by implementing initiatives to expand its shareholder base.Moody’s assessment of strength of member support remains constrained by the low credit quality of most of the bank’s shareholders with an average weighted shareholder rating at B3 and relatively weak contractual support based on the ratio of callable capital to total debt of 28%. At the same time, the mid-term credit risk mitigation instrument introduced in 2017 continues to support its creditworthiness by effectively increasing the likelihood of timely equity injection in the event of a call on additional capital by the bank.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSTDB’s credit impact score is moderately negative (CIS-3), reflecting a negative but limited impact on the current rating from ESG risks, given its adequate governance profile supported by a strengthening risk management framework, with greater potential for future negative impact over time in light of moderate exposure to environmental risks, and low exposure to social risks.TDB’s environmental issuer profile score is moderately negative (E-3), reflecting moderate exposure to physical climate risks and moderate risks arising from carbon transition due to exposure to the oil and gas sector. The latter may over time affect the demand for certain financial products. While exposure to physical climate risk is relatively high for many of TDB’s borrowers, we expect the impact on TDB’s asset quality to remain contained.TDB’s social issuer profile score is neutral to low (S-2), reflecting good relations with member countries, that have supported its increasing relevance in the region, an inclusive and diverse workforce, and emphasis in the bank’s strategy on responsible production and societal trends.TDB’s governance issuer profile score is neutral-to-low (G-2), reflecting sound governance principles and a risk management framework that has progressively strengthened in recent years through staff increases in key risk management functions and by adopting tools to measure risks more accurately.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward rating pressure would likely arise from prospects of a significant strengthening of the capital base, accompanied by further diversification of the lending portfolio that considerably reduces credit risk.Moody’s would likely downgrade the ratings due to a material weakening of its assessment of capital adequacy, due for example to significant deterioration of asset performance or borrowers’ credit quality, and failure of the risk mitigants to perform as expected. Furthermore, a marked erosion of liquidity buffers and/or increased liquidity pressures which impact the bank’s access to funding sources would also likely be credit negative. Any development that leads to an early termination of the mid-term credit risk mitigation instrument for callable capital, or a failure to perform as expected when triggered, would also likely result in a downgrade.The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1232238. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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